Question: We have a field at the edge of the farm that is well located and I’ve been told there is good demand for houses in the area.

I’m thinking of getting planning permission and putting up four or five houses to sell. I know there will be tax involved, but I’m not sure what rate I’m looking at, whether it will be treated like selling land, or if building the houses changes things. I’m also wondering whether I should do it in my own name or through a company. Can you explain how the tax works and what I need to consider?

Answer: Before getting to tax rates, the key question is whether you are selling land or developing property. These are different activities and therefore, are taxed differently. Tax follows what you actually do, not what you call it. Planning permission, construction, four or five units and sale for profit all point to trading activity in Revenue’s eyes, not a capital one.

If you sold the field as it stands, with or without planning permission, it would most likely be a capital disposal, with Capital Gains Tax at 33% applying to the profit. Once you move into active development, such as roads, services, foundations, builders, engineers and units being marketed, you have crossed into trading.

In your own name, trading profit is taxed as income, with income tax, USC and PRSI on top of each other at rates that will be well over 50% for most farmers at this level of profit. Even a once-off project can be treated as trading. Revenue looks at the scale, the number of units, the level of organisation and the profit intention. Four or five houses tick most of those boxes.

Corporation tax

This is why development of this kind is generally done through a company. A company pays corporation tax on trading profits at 12.5%, where it is genuinely developing and selling houses as a trading activity. A separate rate of 25% can apply where the activity is better described as dealing in or developing land rather than actively building houses.

Classification matters: poor structuring or a passive approach can push the company into the 25% rate rather than 12.5%. A separate special purpose vehicle is often used to keep the development activity clean and distinct, which also makes the classification easier to defend.

Banks will generally require a development to sit in a company or special purpose vehicle before lending against it, so the company structure is a commercial consideration as well as a tax one.

The complication is that the land is part of the farm and is likely in your personal name. Before development, it needs to be transferred into the company, and that transfer is taxable. You are treated as having sold the land to the company at market value, meaning Capital Gains Tax on the gain between what you paid and its current value, plus stamp duty based on market value.

Structure before planning

Timing this transfer is critical. If you wait until planning permission is granted, the market value, and the tax on the transfer, may be significantly higher. The uplift from planning belongs to whoever owns the land when planning permission is granted. Get the structure right before applying.

Risk separation matters too. Development carries construction, legal, borrowing and planning risks unrelated to the farm. A company ringfences the development and helps protect the underlying farm assets if something goes wrong, such as a contractor dispute, a structural problem or a market downturn.

VAT also needs to be considered from the outset. Sales of new residential units are generally subject to VAT, while development land can have VAT implications depending on its status. You will almost certainly need to register for VAT affecting pricing, cashflow and contractor relationships. It belongs in the financial model from the start.

Compliance obligation

There is also a compliance obligation that many first-time developers do not see coming. Once the company engages builders, groundworkers or subcontractors, it becomes a principal contractor for Relevant Contracts Tax (RCT). It must register with Revenue for RCT and notify Revenue through the eRCT system before paying any subcontractors.

Revenue assigns each subcontractor a deduction rate of 0%, 20% or 35%, based on compliance.

The company withholds the amount and remits it to Revenue. Failure to operate RCT correctly can result in significant penalties, and, as director, you are responsible for ensuring systems and bookkeeping are in place from day one.

Finally, development can complicate farm succession. Agricultural Relief and Retirement Relief have conditions that are easier to satisfy with a clean farming structure, so development activity and development land should be kept separate from the farm assets you intend to pass on.

Get professional advice before planning, financing or site works.

Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness.